Gold prices down

A drop in Chinese economic growth, the possibility of Cyprus selling its reserves, over-estimated inflation levels or just a classic case of panic selling? Kipp investigates the declining price of gold.

Following the tremors felt around the Middle East this afternoon, the major drop in gold prices is the next most talked about topic. On Friday prices fell to its lowest level in 18 months and prices fell a further three percent on Monday, seeing the drop in prices over the past two days totalling $200.

Gold investor Dennis Gartman reportedly sent this statement to his clients: “We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions.”

So what is the cause of a drop which is being called the sharpest fall for 30 years?

Here are some of the theories:

Slow-down in Chinese economic growth

Some point the finger at a report released on Monday, which shows China’s economic growth in the first few months of this year having dropped from 7.9 percent in 2011 to 7.7 percent. While China’s booming economy has been more resilient to the economic downturn, the recent drop in growth is sending panic waves among investors at the weakest growth China has experienced in 13 years.

Cash-strapped economies looking to sell reserves

Not as popular a view, but some consider the economic crisis in the Mediterranean to be at the core of the drop. Cyprus, for one, needs to raise €400 million and it is speculated the island will attempt to sell its reserves. With prices dropping, the amount that could be raised would be significantly lower. This isn’t a common view many experts subscribe to, however.

Inflation hasn’t risen as expected

Favouritism shown by investors towards gold was a belief that wide-spread inflation will make gold a more lucrative and stable investment. Inflation has not taken off as expected and some think the repercussions haven’t been strong enough to lift gold prices.

Panic selling

And finally, there is the common case of panic selling:

“What we now see is panic selling, perhaps triggered by the Fed’s stimulus view. The Fed has given the signal that there’s a possibility to reduce QE (quantitative easing) and that took a lot of trust out of gold,” said Dominic Schnider, analyst at UBS Wealth Management.